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How a PEST Analysis Can Optimize International Business

Whether it's deciding when to enter a foreign market or where to manufacture a new product, business owners need to understand the larger forces shaping their choices. One systematic way to understand these forces is to conduct a PEST - Political, Economic, Social and Technological - analysis.

"There are political, environmental and social issues that are very different from country to country, so you must understand the comprehensive intertwined dynamics of the market you're in and how the dynamics of one market may affect that market as well as another," says Nanette Bulger, executive director of Strategic and Competitive Intelligence Professionals, a research focused membership association based in Falls Church, Va.

Three strategy experts break down the four steps in a PEST analysis and show how each can be applied to an international business looking to enter a new foreign market.

Look at foreign customers’ disposable income and employment rates, which help determine their appetite for new products.

1. Political

For each foreign country, Bulger says, examining the current regulations of a particular country or market environment governing an industry may reveal what restrictions may be placed on a market, a company and its ability to produce viable products and services for that market now and in the future.

It's also worth looking at each foreign country's tax laws and structure, and its import and export policies. A market such as Brazil, which imposes high import duties to protect its domestic economy, may be less attractive to a U.S. business than a country with lower tariffs.

2. Economic

"You want to see how economic conditions are going to influence your revenue and your customers' potential purchasing behavior," says Holly Lyke-Ho-Gland research lead for the growth team membership division in the San Antonio office of Frost & Sullivan, a global research and consulting firm.

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Look at foreign customers' disposable income and employment rates, which help determine their appetite for new products. Growing numbers of middle-class citizens in Nigeria or Zambia, for example, have made these foreign markets increasingly attractive to international businesses.

Also, be vigilant about a currency fluctuation in a foreign country. Business owners can use the free online currency converter of a trusted online foreign exchange provider to monitor dollar exchange rates and perform a wire money transfer to China and around the globe.

3. Social/Cultural

Social factors are often tied to demographics, Lyke-Ho-Gland explains. For instance, a business entering a country with a large Millennial population will want to reach these consumers through the mobile phones or social networks they use for a wide range of activities.

Environmental considerations are a growing aspect of this category. Bulger notes that the Netherlands, for example, heavily relies on wind power, and its consumers are focused on sustainability, so business owners entering this market should prepare for scrutiny of its environmental policies.

4. Technological

Technological change is disrupting every industry in every market. "Buying a house anywhere in the world is now easy with Skype, a digital camera and the Internet. Just think - you can now view and buy an apartment in Hong Kong from Chicago, all through the Internet," says Babette Bensoussan, co-author of Analysis Without Paralysis: 12 Tools to Make Better Strategic Decisions and managing director of The MindShifts Group, a Sydney-based consulting firm that specializes in competitive intelligence.

Look at changes in both products and infrastructure, such as new technology in business that could make an operating plant more efficient, Lyke-Ho-Gland suggests.

A PEST analysis can help a small international business move more nimbly than its giant competitors in order to capitalize on an opportunity. "PEST gives small companies big company advantage because they focus on targeted areas of importance as they monitor environments," Bulger says.

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